Monday, September 15, 2008

Billy Beane is the general manager of the Oakland Athletics whose exploits have been made famous through the Michael Lewis book “Moneyball.” The Moneyball story tells of a young, unorthodox general manager whose fresh approach to running a baseball team allowed his small market Oakland Athletics to remain competitive during a time when the gap between small market and big market teams was growing larger and more critical to the team’s prospects of success.

In baseball, teams that play in large media markets have an inherent structural advantage over those who play in smaller markets. Initially this difference manifested as higher attendance and more revenue from local broadcast deals. But as the economics of baseball grew, this difference became more pronounced, the owners tried to correct this problem through increased revenue sharing. Of course large market teams acted to protect their revenue streams, and consequently found even greater revenues available to them through innovations like luxury boxes and vertical integration into national television networks. Salaries continued to grow for players, and soon many of the smaller market teams found themselves priced out of the market for the established talent.

The Oakland Athletics are one such small market franchise. But rather than simply cutting costs and accepting losses, a culture of innovative and creative thinking began to emerge under general manager Sandy Alderson. Like a small company that streamlines and specializes to effectively compete with larger adversaries, the A’s looked to find competitive advantages that would allow them to compete for less. When Alderson left Oakland to work for the Commissioner of baseball, his young protégé Beane took over.

Beane began to base personnel decisions on rigorous statistical analysis. This analysis including using metrics which other teams have long ignored. Through the popularity of Moneyball, Beane has often been credited with “inventing” statistics like on-base percentage and OPS (a metric that combines a player’s ability to get on base with his ability to hit for power). But Beane did not invent these metrics; he simply recognized the need use them, allowing him to spend his limited resources more effectively.

Beane is a pioneer for using statistical analysis to recognize that an underpriced resource existed. He then exploited this market imperfection to construct several teams that competed on a fraction of the payrolls of large markets teams like those in New York, Boston and Los Angeles.

His approach has spread rapidly, both through its popularization via Moneyball, but also from the dissemination of his protégés to the front offices of many other teams. Beane’s Athletics have fallen on harder times in the last few years, as his advantage disappeared as the market corrected, but he continues to identify other underpriced (or overpriced) resources. Despite the recent lack of success on the field, Beane’s most recent strategy appears to be to trade pitchers who are approaching their free agent years for multiple prospects. This approach has loaded Oakland’s farm system with many high-ceiling prospects, and many talent scouts expect another period of success for this small market franchise in the near future.

Beane’s innovative approach has allowed many more small market teams to field competitive teams, at least in the short run, and has kept the interest level in baseball at a high level, despite the structural inequalities that many expected to ruin the sport.